Everyone's Doing the Apple Tax Dance

Apple is employing several legal tax strategies to take its record-setting profit levels even higher, according to a recent New York Times article.

For example, the company's business doesn't just operate out of Cupertino, Calif., where the corporate tax rate is 8.84 percent. Apple has an office in Reno, Nev., where it can manage investments at a zero percent corporate tax rate, according to the report.

The company also takes advantage of lower overseas rates. When customers in Europe, Africa or the Middle East make an iTunes purchase, the sale is reportedly funneled through an Apple subsidiary in Luxembourg. Since a downloadable item is taxed differently than something tangible that can't be counted in inventory, it's not taxed the same way a computer or automobile would be.

Apple was one of the pioneers in identifying those strategies regarding e-commerce, according to the report.

In addition, the company has allocated about 70 percent of its profits overseas in countries in which it can take advantage of lower tax rates. One example cited in the report, known as the "Double Irish With a Dutch Sandwich," has accountants route profits through Irish subsidiaries and the Netherlands, and then to the Caribbean.

The Times claims that Apple was one of the first companies to use that strategy, and it has since been imitated by hundreds of other corporations.

The strategies are paying off, according to a recent tax study cited in the article. The company saved US$2.4 billion last year, according to a study by Martin Sullivan, a former Treasury Department economist. Apple paid a 9.8 percent tax rate on its earnings last year.

Apple didn't respond to our requests for comment on the story. It did respond directly to the New York Times, though, stating that it complies with all tax codes and accounting rules. For example, the company said, in the first fiscal half of 2012, it's already generated nearly $5 billion in state and federal income taxes. Apple also asserted it had created 500,000 jobs for United States workers.

Not Alone in the Game

Although the ways in which Apple apparently avoids paying high tax rates may seem complex, Anthony Infanti, tax law professor at the University of Pittsburgh School of Law, told the E-Commerce Times that the practice is far from unusual.

"Apple is certainly not alone in engaging in this type of activity, and nothing in the story surprised me when I read it," he said.

Especially for a company raking in as much profit as Apple and some of its competitors in the tech market, different tax strategies are just a part of doing business, said Reuven Avi-Yonah, professor of law and director of the International Tax LLM program at the University of Michigan.

"Most U.S. tech companies engage in similar tax planning," Avi-Yonah told the E-Commerce Times. "Google has a very similar structure to the one described in the New York Times article."

However, that does not necessarily make the behavior right, the University of Pittsburgh's Infanti said.

"The larger problem is that such behavior -- and the defense that everyone is engaging in it -- only erodes respect for our tax system, which relies to a great extend on taxpayer self-assessment," said Infanti. "When those with means are able to lower their taxes by engaging in what is often artificial, entirely tax-motivated behavior, everyone loses respect for the tax system."

Tech Tax Needs to Catch Up

One way to start rebuilding faith in the system, Infanti said, is to make sure the law is caught up with e-commerce business practices, since many were written with more traditional brick-and-mortar companies in mind.

"The tax laws have generally lagged in catching up with the rapid advance of technology and how it is disseminated," said Infanti.

Intellectual property laws also make it easy for companies like Apple to get around certain traditional methods of taxation, according to Daniel Shaviro, professor of taxation at the New York University School of Law.

"Intellectual property, which underlies the success of a company such as Apple, is harder to source," he told the E-Commerce Times. "So tech companies can readily arrange things so that, even in full compliance with existing laws, huge portions of their taxable income are treated as earned in offshore tax haven subsidiaries where little or nothing is actually happening in economic terms."

The tax experts that spoke to The New York Times agreed the laws were outdated, but they didn't foresee a quick or easy fix to the tax system, or at least not until after November.

"I hope tax legislation can be enacted after the election," said Avi-Yonah.